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In the tax year in which you have your 65th birthday you can be eligible for higher personal tax allowances called age allowance. These are at a higher rate from the tax year when you reach the age of 75.
The way the rules for age allowance work can mean that to get the best after tax return, and thus the highest retirement income, your choice of investments must be divided between those suitable for a non-taxpayer where tax is not deducted, a basic rate taxpayer paying tax at 20% and a 40% higher rate taxpayer.
If you receive the State retirement pension and no other pension or a very small pension or another pension which is fully or partly exempt from tax, see list, it's likely that some of your income from investments is not liable to income tax. If you are in this position you may have to claim a rebate of tax deducted from income on your investments.
Age allowance is given instead of the normal personal tax allowance if your income is below a certain level. The age allowance income limit for 2008-2009 is £21,800 . If your income comes to above this limit, your age allowance is reduced gradually as your income rises until it comes down to the normal personal tax allowance.
There are two scales of age allowance: if you are 65 to 74 the allowance £9,030 in 2008-2009. If you are 75 or over the allowance £9,180 in 2008-2009.
There is also an extra married age allowance. However you only get it if one spouse was born before 6 April 1935. For 2008-2009 it is £6,535 (£6,625 if one of you is 75 and over). The extra married age allowance only gets tax relief at 10%. Only one partner of the married couple gets the married age allowance, the other gets the age allowance only - or you can have half each.
Married couples
Separate taxation of a husband and wife's income applies to pensioners just like any other married couple. Provided couples can split their income more or less equally between them, that can give rise to a considerable tax saving.
If both husband and wife are over age 65, they are each entitled to age allowance on their own income. A husband and wife can each have an income of up to £21,800 and get full age allowance. So a couple both over age 65 can have a combined income of £43,600 in the 2008-2009 tax year and each get full age allowance.
If a couple has an income of £43,600 which comes mainly from investments and they can arrange matters so that they each have half the income, that is £21,800 each, their total tax bill will be several hundred pounds a year less than compared with the situation before they were 65. The actual amount depends on whether they are over age 75 and what type of income they receive.
Married couples with large pensions Pensions count as the income of the person who receives them. So you each have your personal tax allowance for 2008-2009 of up to £5,435 set against it if you are under 65, or the personal age allowance of £9,030 (age 65-74) or £9,180 (age 75 or over). The married age allowance can be set against either spouse's pension or you can have half each.
There is no scope for switching pensions from husband to wife or vice-versa once they have started to be paid. But people planning to retire should aim to try and equalise their pensions in retirement to enable them to pay the least tax under these rules.
Juggling investments
It is quite permissible to transfer money and assets from husband to wife and vice-versa in order to try and equalise your incomes as far as possible. Joint holdings will be taken by the Inland Revenue to be owned half each, unless you tell them otherwise by signing a form. Your tactics should be the same as for a wife under retirement age, see Wives' Income and Investments. There is no disposal for capital gains tax purposes for transfers between husband and wife.
Tax effective investments
Here is how to work out your most tax effective investment strategy which as mentioned above may mean choosing some investments suitable for non-taxpayers, some suitable for basic taxpayers and even some suitable for higher rate taxpayers.
Taxable pensions less than total tax allowances
If that is the case you should invest in the following investments (in alphabetical order) where tax is not deducted until the interest on your investments plus your taxable pensions reaches your tax allowances. This will save you the trouble of having to claim a tax rebate. However if you don't mind claiming a rebate, use the other investments mentioned later in the Chapter as well as they may pay you better interest.
Marginal age allowance
If your income is over the age allowance income limit, you lose £1 of age allowance for every £2 by which your income exceeds this figure until the age allowance is reduced to the level of the ordinary personal tax allowance.
These income limits refer to before tax or gross income. If part of your income is from dividends or unit trust distributions you must add the 10% tax credit to determine whether they fall within the limits.
By losing your basic age allowance within these income bands, although you are only a 20% rate taxpayer, you are in effect being taxed at a 30% rate. . If your income falls within these bands you might consider investments suitable for higher rate (40%) taxpayers to reduce your taxable income to £21,800. These are:
Bank or Building Society Cash Mini ISA Summary
To summarise: if you, or your husband or wife, are over 65 and your or your spouse's total income (from investments and taxable pensions) is below the actual age allowance levels applicable to each of you are a non-taxpayer. Only one married partner gets the married allowance as well, the other gets the single allowance.
If your individual income is above the age allowance levels but each of your income is under the £21,800 age allowance income limit, you pay tax at 20% oon the excess over the age allowance but you are still a non-taxpayer on any amount below the allowance which is not set against taxable pensions.
If your individual income is withinthe marginal age allowance band, a few thousand pounds above £21,800, then extra income between these limits reduces your age allowance and tax is equivalent to a rate of about 30%.
The best income
In retirement you usually want to get the highest income you possibly can from your investments. The income can be fixed or variable and the money you invest can also be fixed or variable. The most convenient income is monthly but it may be easier to have the income paid half-yearly when you have less than, say, £10,000 to invest.
Fixed income and fixed capital. With these investments you know the return you are going to get at the outset, usually for a fixed period of time called the term or with an annuity for the rest of your life.
Variable income and fixed capital. Here your capital does not vary but the income can go up and down. These include:
Fixed income and variable capital. Investments where the income is fixed but where your capital can go up and down in value. These include:
Variable income and variable capital. Where neither the income nor the capital is fixed. These include:
Riskier investments with variable income and capital. This is really the same as the last category except that they generally have a lower income and less certainty of what you will get. These include:
Equity release schemes
If you are short of money but own a home you wish to stay in, you can raise money on it by borrowing against the security of the home. The loan is usuallly 25% to 45% of the value of the property. There is usually a proviso that you need to start making payments if the loan begins to exceed 75% of a current valuation. You may be asked to pay for regular valuations of your property if property values stop rising.
The lenders allow older people to take a loan on an existing property which is paid off when they die. Most lenders including Chesham BS, Harpenden BS, Kent Reliance BS, Newbury BS, Legal & General, Newcastle BS, Northern Rock, Norwich Union, Portman BS , Scottish Widows, Stroud & Swindon BS allow interest to be accumulated (i.e. you have no payments to make). Another alternative is to sell all or part of your home to a reversion company which allows you to stay in it or take out a home income plan if you are very old
Minimum Income Guarantee
If your income is really low, you will qualify for the Government's Pension Credit which guarantees anyone over age 60 an income of £124.05 a week (£6,450 a year) for a single person and £189.35 a week (£9,846 a year) for a couple. Your capital is ignored if it is below £6,000 and the guarantee is reduced between £6,000 and £12,000 (£16,000 a year if you live permanently in a nursing home) above which you are not eligible. If you pay rent, you can get extra.
 Last updated 8 April 2008. |
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